Your Tube, Whose Dime?

The Web lets users watch whatever they want, whenever they want to watch it. So what do they want to see? A home-made video of two boys lip-synching along to the Pokémon television theme song. Internet video site YouTube has streamed the video more than 9.5 million times in the last four months, making it the site's most-watched movie.

Startup of the moment YouTube, which garnered 12.9 million unique visitors in March, doesn't care what viewers watch, as long as they keep tuning in. Making money is another matter: The site, which has raised $11.5 million in venture capital in the last year, didn't see a penny in revenue until March, when they cautiously began selling ads. Meanwhile the site's bandwidth costs, which increase every time a visitor clicks on a video, may be approaching $1 million a month--much of which goes to provider Limelight Networks.

Internet optimists predict that online video, long-rumored to be the next big thing, is finally taking off: IDC estimates that video generated $230 million in revenue in 2005 but will jump to $1.7 billion by 2010. In the meantime, the best play in Internet video may not be the companies that show off the clips, but the ones who deliver them to users' PCs.

The content-delivery business may be a $500 million a year business--twice the value of Internet video advertising and users fees--and is growing 25% per year, IDC estimates. It is dominated by big, publicly traded hosting providers such as
Akamai Technologies
and
AT&T
, as well as boutique shops such as Limelight, which also serves News Corp.'s
MySpace and Microsoft's
Xbox Live videogame service. Some of the biggest portals, like
Yahoo!
and
Google
, have built up their own content-delivery networks and don't need to pay a third party for many services.

The bandwidth companies typically charge video sites up to a penny per minute of video streamed. Big players who buy in bulk get discounted rates: Industry observers estimate that YouTube, which is streaming 40 million videos and 200 terabytes of data per day, may be paying between a tenth of a cent and half a cent per minute. Neither YouTube nor Limelight would comment on their pricing.

And while privately held Limelight doesn't open its books, Akamai this week posted earnings of $11.5 million in on revenue of $91 million for the first quarter of this year; the company's stock has tripled in the last year. IDC analyst Rona Shuchat says Akamai may control half of the content-delivery market.

Some upstarts in the video Web market are betting on a different content-delivery model. Instead of paying for professional hosting, they're hoping people will open their digital subscriber lines and cable modems to transfer data between users instead of sending everything from a central server. This "peer to peer" setup has been successful for online phone service Skype, purchased last year by
eBay
, and underground file-sharing networks using software called BitTorrent, which some say is responsible for one-third of all Internet traffic.

Gilles BianRosa, chief executive of BitTorrent-software maker Azureus, says peer-to-peer networking could save his company 95% in hosting costs when it launches a community-based video site in the next few months. Other companies are already onboard: WurldMedia Chief Executive Gregory Kerber, whose company will start serving movies and television shows for General Electric's
's NBC-Universal this year, says the peer-to-peer model is the next step in Web video evolution. "We can sell to the consumer at the same price point that they're used to, but we'll be giving them a higher-quality product that's more versatile," Kerber says.

But peer-to-peer transfers can be flaky. They require willing participation and good behavior from users, including access to their upstream bandwidth that most broadband service providers already cap tightly. As a result, some video-delivery specialists such as Solid State Networks are hedging their bets with a mix of peer-to-peer and traditional content-delivery. Solid State Chief Executive Rick Buonincontri eyeballs cost savings around 50% over standard hosting while maintaining a professional service-quality level.

Dan is a founding member of the Business Insider and Silicon Alley Insider editorial teams. He joined in 2007 from Forbes, where he was a Technology Reporter focusing on the wireless, telecom, and networking industries. Dan also created and co-hosted "The Download," a Web ...